House prices are falling. So why are first-home buyers disappearing?

First-home buyer mortgage demand is shrinking rapidly. Fewer people are applying for loans to buy their first property. This matters because falling demand suggests affordability pressures remain powerful, even after house prices have started easing. The article describes the decline as the sharpest annual fall in first-home buyer mortgage demand since December 2022.

Overall mortgage demand fell 19.2 per cent in September compared with a year earlier. New home loan applications fell even further, by 22.1 per cent. By contrast, house prices across Australia slipped only 1.1 per cent. The difference shows that a modest price decline has not offset the financial barriers facing buyers.

Average first-home buyer mortgage sizes were still about $743,000, a record level. Strict serviceability tests, higher interest rates, and rising living costs are discouraging potential buyers. Without stronger borrowing capacity or help from family or institutions, many may continue delaying home ownership.

A mortgage serviceability test is an affordability check used before a lender approves a home loan. It assesses whether the borrower appears able to meet repayments under the lender’s required conditions. The article highlights strict regulatory serviceability assessments as a major barrier for aspiring first-home buyers and existing borrowers.

The mechanism is straightforward. A lender compares a household’s income and financial commitments with the repayments it would need to manage. Higher interest rates increase those repayments, while rising living costs reduce the money left over. If the household does not clear the required assessment, the lender can refuse the loan or limit how much it will lend.

This can keep people out of the market even when prices fall. The article says strict testing is holding borrowers in place, and many first-home buyers cannot afford repayments without family or institutional support. There is no quick fix because several pressures are operating together.

Mortgage activity weakened sharply in September. Overall mortgage demand fell 19.2 per cent from the same month a year earlier. New home loan applications performed even worse, dropping 22.1 per cent. These figures indicate that households were stepping back from borrowing, rather than responding strongly to the small decline in property prices.

Younger borrowers saw the largest retreats. Mortgage demand among 18–25-year-olds fell by a quarter, or 25 per cent. Demand among 26–35-year-olds fell 22.5 per cent. These groups are especially exposed to the combination of high property prices, interest rates, living costs, and the difficulty of raising a deposit.

The figures show that the slowdown is broad but particularly severe for younger Australians. Average first-home buyer mortgage sizes remained around a record $743,000. That high borrowing requirement helps explain why a 1.1 per cent fall in house prices has not restored access to the market.

A fall in property prices does not automatically make homes affordable. The article says prices slipped 1.1 per cent, but baseline prices remained high. First-home buyers still need to borrow large amounts, and their incomes must support the resulting repayments under strict lender assessments.

The average first-home buyer mortgage was hovering at a record $743,000. At the same time, higher interest rates raise repayment costs, while spiralling living expenses leave less money available for housing. Many potential buyers also struggle to build a deposit. These pressures reduce both the amount a household can borrow and its ability to pass serviceability testing.

Family or institutional support can make the difference, but not everyone has access to it. Kevin James said there was no silver bullet. The article indicates that several elements must be addressed together if the market is to become more accessible to younger Australians.

A household’s borrowing capacity depends on how much income remains after regular expenses and expected loan repayments. Higher interest rates make the same loan more expensive to repay. Rising living costs also take a larger share of income. The article identifies both pressures as reasons young Australians are struggling to buy homes.

The deposit creates another hurdle before borrowing starts. A household must save enough money to contribute toward the purchase, while still showing it can afford repayments. If saving is difficult, the buyer may need family or institutional support. If repayments appear too high during serviceability testing, the lender may approve less or reject the application.

These pressures reinforce one another. A smaller approved loan may not cover a suitable property, while a large loan creates heavier repayments. Although property values have eased, average first-home buyer mortgages remain around $743,000. The article therefore points to a layered affordability problem, not a single obstacle.

Existing borrowers may want to switch lenders to obtain a better interest rate. However, the article says many cannot clear the required serviceability assessment. Strict regulatory checks can make their current financial position appear insufficient for a new loan, even if the new lender’s rate would reduce repayments.

The mechanism creates a barrier to refinancing. Borrowers must qualify under the new lender’s assessment rather than simply move an existing loan. Higher rates and living costs can make that test harder to pass. As a result, a borrower may remain with the current lender because switching is unavailable, not because the existing deal is attractive.

Lender-switching fell 8.8 per cent compared with a year earlier, after being nearly flat in August. Fewer customers moving between banks can weaken competition for borrowers. It may reduce the pressure on lenders to offer better rates, although the article does not quantify that effect. James described borrowers as effectively locked into current arrangements.

Mortgage affordability depends on the repayment required over the loan’s life. Each repayment includes money toward the borrowed amount and interest charged by the lender. A lower interest rate generally makes repayments easier to manage, while a higher rate increases the cost of borrowing and the income needed to support the loan.

For example, a household may appear able to afford a mortgage when repayments are calculated at one rate. If the assessed rate is higher, the same loan requires more money each period. That leaves less income for living costs and can cause the household to fail a serviceability test. The article links high rates and strict testing to falling demand.

This is why a small property-price fall may not solve the problem. Buyers still face large loans, with average first-home buyer mortgages around $743,000, plus rising living costs and deposit requirements. Over time, a loan must remain manageable, so lenders assess more than the purchase price alone.